Order Flow – Sentiment and Fundamental Value

I will introduce sentiment order flow and fundamental order flow into the equation.

Sentiment – Can provide a bias for a certain period of time.

My experience has taught me there are different types of sentiments. There can be a sentiment that lasts for a really short time, like less than an hour. There can be sentiment that lasts for a few hours towards the whole day. There can be sentiment that lasts for a few days. There can be sentiment that goes strong for a few weeks. There can be sentiment that can last a few months. It can definitely go longer than that as human beings can do anything and be lulled into complacency for long periods of time.

You can definitely have a shorter term sentiment embedded within a longer term time frame for sure.

Sentiment can sometimes be a leading indicator. In other words, depending on how strong the sentiment is it can lead to market orders being executed in the market, thus causing the market to move. Sentiment can sometimes be lagging behind the market and cause a large amount of bargain hunter bids/offers to come into the market at key levels and soak up liquidity. Sentiment can also sometimes converge with price. Meaning sentiment can sometimes be equal with price, so there isn’t much sentiment order flow being generated at that specific moment.

Sentiment can definitely sometimes change within seconds. Other times it can be gradual and take minutes, hours, days, or weeks, or months. Now you may say well, you are talking about every single time frame out there. Well yes, when we are talking about order flow, we are talking about human beings and they can be fairly unique and crazy at times, so you need to cover all the situations as anything can potentially happen within seconds.

Fundamental – Is similar to sentiment. But the difference is that fundamental order flow can be more concrete at times. In other words in my experience, it can be a more reliable indicator and order flow generator, as sentiment is sometimes harder to track than the fundamental value.

Can be a leading indicator. In other words, the fundamental value of a currency pair might be 300 pips away lets say, and the market will gradually move towards that value.

Can change in an instant. Fundamental value can change within a split second. Other times it can take minutes, hours, days, weeks, or months. While the fundamental value can change in a split second, that does not mean that all the fundamental order flow was consumed within a split second. It is entirely possible for the fundamental value of a currency pair to have moved lets say 200 pips higher, but only 60 pips of fundamental order flow having been generated. The rest of the fundamental order flow can come in over the next few minutes, hours, days, weeks, months, etc.

Price can sometimes slowly reach the fundamental value, other times it can be violently quick reaching the fundamental value. It can be slow at times as the order flow from the latent orders/fundamentals can be slow to materialize. It can take some market participants a while to correctly interpret all the information and make a decision. So fundamental order flow can be slow to be priced in, other times it can be priced in very quickly. It can be slow to be priced in also because forex is a 24 hour market and therefore the order flow can be slowly spread over the course of the day as different market participants are pricing in different things throughout the course of the day. With stocks it is more visible as there can be huge gaps as the market needs to account for overnight changes in fundamental value, and a lot of it happens at the market open the next day. Stocks don’t have time to spread the fundamental order flow pricing in over the course of 24 hours. A lot of it gets done in one shot. That is why forex is so good, because of the inherent inefficiency of a 24 hour market.

Price does not always reach it’s fundamental value. Sometimes because of order flow unrelated to fundamental value stops it, or because the fundamental value changed again. Remember fundamental value can sometimes change in a split second.

Sometimes fundamental value has changed, but many market participants are oblivious to it yet, but they can change their minds over the next few minutes, hours, days, etc.

Sometimes fundamental value can converge with price. Yes, that can happen as well.

It is important to assess what the market is focusing on at the given moment. Remember not everyone is going to interpret things in the same way, at at the same time as you do, and it is immensely important you understand that. Every human being is different and interprets thing differently. That is just the way humans are.

The market can misjudge sentiment/fundamentals constantly and the market participants do not necessarily position themselves correctly.

The market can do anything it wants. It can push a trend/retracement to extremes, past extreme sentiment, to even more extreme levels on different occasions.

Just because the market has moved x number of pips, lets say 1,000 pips doesn’t mean it can’t move another 1,000 pips even faster than before. The market can do anything it wants as long as the order flow scenario/situation takes place and the liquidity is consumed, the market can do anything it wants.

There is nothing wrong with top and bottom picking. Some people like to do it for large trends, which obviously happen less often. Others like to do top and bottom picking of the retracements inside a major trend, which happen more frequently. Other times it does not matter if your a top and bottom picker, because price is about to breakout from a tight congestion, so there is no real clear top or bottom.

If you really think deeply about the markets over the past few decades, there is usually always a good reason , or series of reasons, or order flow scenarios that caused the huge moves, medium sized moves, small moves of the past. Whether it was in 1978, or 1985, or 1998, or 2011, or boom, or bust, or rangy, or anything. There is a good order flow reason for pretty much everything. There is always a reason why the market moved 30 pips, 50 pips, 100 pips, 500 pips, 1000 pips, 3000 pips, etc. And no it is not because of a moving average crossover or stochastic. If you can isolate the true reasons why the market moved in the past, and more importantly why it will move in the future, then that is a true trading edge, an edge that can persist indefinitely into the future.

I would recommend to people to stop spending time on the things that will not, or almost never will generate enough order flow to move price, and start spending time on the things that actually generate order flow and move price and give you a true edge.

Small moves, medium sized moves, large moves will always occur at various points in the future. Can you figure out what are the order flow generators/scenarios that will cause the market to move?

Rangy markets, false breakout markets, trending markets, super trending markets, etc will always occur at various points in the future. Can you figure out the order flow generators/scenarios that will cause such market conditions to occur?

All of the information is out there for you to collect and interpret. The only barriers that exist are pretty much in your mind. Some are visible, some are invisibile. Some of known, others are unknown. You can go collect information from every single day going back decades for you to find what truly caused the market to move. You can do order flow analysis today to find the real reason why price moved and help you be better prepared for the days ahead. Can you get razor sharp clarity on why the market moved everyday? Definitely not. There is such a thing known as noise, and the market can do some very weird things that catch even the most prepared order flow trader off guard. But the beauty of trading is that you can choose to stay out of the market.

People generally do not suffer from lack of order flow information/examples. the market gives you examples and information every day, going back decades. It is all about if you can properly assimilate the information assign proper meaning and sensitivity, and know when/if to trade, and how to structure the trade properly.

Everyone starts out the day with the same information pretty much. It all depends on how you interpret it, what your mindset is, what your expectations/limitations are, if you know how to properly use the information, depends what meaning you assign it, and what you do with the information.

Yes in the beginning it is very hard as you are learning something new. I am trying to provide some damn good information for you to work with. In the end it is your choice if you want to take action on it, your choice on how to interpret it, your choice on how much short term pain and discomfort you want to tolerate, your choice on what to do with the information. I can’t (nor can anybody else) make you an order flow trader. Only you can do that.

Back when I learned, I was putting in 100 hour weeks into order flow trading for about 6 months straight. You need to eat, sleep, and breathe order flow trading within a short time span to make the breakthroughs needed. Generally you will need to work very hard for a short while, and endure through short term pain, in order for medium term and long term success. Some people maybe are gifted and can do it in less time, for others it may take longer. I really don’t know if I could of become an order flow trader with just 10 hours a week. I never wanted to take that chance, so I poured my time, effort and determination into it.

Get out there and place some live trades with very small risk. Get some winners and losers and analyze them. Find out what truly caused the market to move in your favor or against you. Often times many people are placing far lower probability trades / guaranteed losers and they don’t know it. Get out there and find the order flow generators. Find out what will cause the market to move. Play out the scenarios in your head.

Apply the knowledge. Find more inspiration to help you along. You need repeated exposure to order flow knowledge, trades, information, examples. Go figure out that next piece, then the next piece, then the next. You generally need to process and then attempt to apply a lot of information as fast as possible. I go through a lot of information each and every day and searching for the 5-10% of the information that really matters, then I can assign proper meaning and sensitivity to it, perform order flow analysis and scenario analysis to prepare me for the next trading day.

I attempted to condense a few years of order flow knowledge/wisdom into one post.

Absorb that for a while. I may post some charts/examples at a later point in the week.

Just as everyone interprets information about the markets differently, so too with everyone reading the above post. Some people may find it very useful, other people completely useless. Others may find value in it only after they have been on the journey for a few years. Everyone is different, thats just the way we are, and the way we will always be.